Apple execs focused on software driven product cycle, says analyst

Fresh off a meeting with senior executives at Apple, Morgan Stanley analyst Katy Huberty said the company sees product cycles as being driven by software rather than hardware and is expected to announce major software updates at the Worldwide Developers Conference in June.

After meeting with Apple Chief Financial Officer Peter Oppenheimer, Senior Vice President of Retail Ron Johnson and Vice President of Internet Services Eddy Cue, Huberty issued a note to clients reiterating her Overweight rating for the company and downplaying concerns about the company's margins and the possibility of iPhone saturation.

Huberty also restated her belief that the company's Earnings Per Share could reach $50 in 2013, driven by "lower priced iPhones, iPod like market share in tablets, and expanding distribution in China and other emerging markets."

According to Huberty, Apple executives highlighted the fact that "the company generally views product cycles as software driven" during their meeting. Given the software emphasis, Huberty suggested that "major feature/function updates" will come at Apple's Worldwide Developers Conference, which runs from June 6 through June 10 in San Francisco.

After Apple announced that it would "unveil the future of iOS and Mac OS" at the conference, rumors swirled that the company would hold off on announcing a next-generation iPhone as it has in years past.

Though Huberty said Thursday that Apple did not confirm during the meeting whether an iPhone hardware refresh was in place for later this year, she did address investor concerns that a delayed refresh would affect profits. Since Apple sees itself as software focused, major feature updates in iOS 5 and Mac OS X 10.7 Lion are expected to drive sales.

Huberty also took away from her meeting with the company's executives the message that Apple has several "potential tailwinds" that could better the company's margins, such as improved product costs, lower warranty expense and higher iPad ASPs.

Apple is confident that the iPhone has room to grow, according to the analyst. Given that Apple sells the device in just 90 countries and approximately 185 carriers, compared to over 175 countries and more than 575 carriers for competitors, iPhone shipments are expected to continue to grow in a "natural expansion." The iPhone maker also communicated to Huberty that, based on "daily or weekly data from partners," it remains confident in the smartphone's inventory levels.

Huberty also reported that the company "plans to expand current retail stores and build larger new stores (up to 50/yr)" and will free up space for product set-up services to reduce product returns and increase overall transaction size.

Apple Retail has seen phenomenal growth as of late. Earlier this week, one analyst predicted that revenues from brick-and-mortar stores would "continue on a roll" as visitors flocked to the stores to try out the iPad. The first Apple Stores celebrate their 10th anniversary on May 19th.

As of the close of market on Wednesday, shares of Apple stood at $349.57, up $1.37 from Tuesday's close. The company's stock price has risen 8 percent since the beginning of the year.

Someday, perhaps there will be an Apple Store on every continent. Including Antarctica. Hey, lots of smart scientists like spending the summer at Amundsen-Scott Station.

Start first in Hong Kong, India, South East Asia... You know, all these emerging markets where all of Apple's growth is going to come from. Official Apple Stores are essential to solidify the brand experience and ensure sustained, extraordinary growth.

It's clear that dealing with the thuggery of Asian telcos and resellers is going to hold Apple back in the long run.

It's blindingly obvious that by 2015 the middle and upper class of China, India, Greater China and South East Asia will thoroughly eclipse the potential of US sales. Like Apple says, it's trying to figure out the best way of approaching this starting from China. There are a lot of hoops to jump through because Asia is actually quite diverse very unlike obviously the US and the EU.

Someday, perhaps there will be an Apple Store on every continent. Including Antarctica. Hey, lots of smart scientists like spending the summer at Amundsen-Scott Station.

Instead of an all-glass store, it will be all-ice! Wicked.

"We developed a special grade of ice that is both remarkably strong, unbelievably thin, and can withstand temperatures of up to 30degF above freezing point, ensuring an unbelievable experience for our Antarctic customers." -Jonathan Ives

"We developed a special grade of ice that is both remarkably strong, unbelievably thin, and can withstand temperatures of up to 30degF above freezing point, ensuring an unbelievable experience for our Antarctic customers." -Jonathan Ives

Dont forget the we started with a single block of ice and when were finished we ended up with a single block of ice."

Dick Applebaum on whether the iPad is a personal computer: "BTW, I am posting this from my iPad pc while sitting on the throne... personal enough for you?"

"We developed a special grade of ice that is both remarkably strong, unbelievably thin, and can withstand temperatures of up to 30degF above freezing point, ensuring an unbelievable experience for our Antarctic customers." -Jonathan Ives

Quote:

Originally Posted by solipsism

Dont forget the we started with a single block of ice and when were finished we ended up with a single block of ice."

And is remade every year: thinner, lighter, and with twice as much magic as before. It truly does "change everything...all over again."

People like shiny new objects. Software alone doesn't drive sales... Even with M$ - they got most of their sales from OEMs cranking out new hardware...

Apple needs to be working on that iPhone5. Having a new model by June is not necessary, but I think they sure as heck need to have one ready for the holidays, say, around September.

Apple also needs to broaden the iPhone models. Customers want choice, and the one-size-fits-all approach of the iPhone is getting really stale. Apple should know this. There are 4 different models of iPods...

I believe Apple needs to make 3 different models of iPhone - small, medium, large (relatively). The feature set (iOS) should be the same on all three. The small unit could be powered by the A4 chip, while the med & large would have the A5 chip. Storage capacity would further differentiate the models. This would not be hard to do, and they don't have to be too different, just some basic choice for customers is all.

I believe Apple needs to make 3 different models of iPhone - small, medium, large (relatively). The feature set (iOS) should be the same on all three. The small unit could be powered by the A4 chip, while the med & large would have the A5 chip. Storage capacity would further differentiate the models. This would not be hard to do, and they don't have to be too different, just some basic choice for customers is all.

I don't agree with this. Apple continue to sell the previous version of the iPhone when the new one comes out for this very reason. It gives consumers choice at a lower price. You want an iPhone? You have 3 options, 8GB iPhone 3GS, 16GB iPhone 4 and 32GB iPhone 4, then obviously the Black / White preference, all at different price points. It is my firm belief that they won't ever have 3 separate current generation iPhones on sale at any one time. It will always be previous gen with small storage, current gen with medium storage and current gen with large storage.

Does that mean there's a possibility at some point there going to start charging for the updates.

I think what it means is that we shouldn't expect iPhone hardware until the new iPhone software is ready to go. Which is likely why the iPhone won't be out til September or later. I think Apple wants us to get used to new iPhones coming out with a more irregular pattern.

If Apple thinks Joe consumer will skip an LTE phone with more memory, faster processors, bigger screens etc. for an old iPhone 4 just because it has a new OS version, they are nuts.

I am sorry but hardware absolutely still matters and the iPhone 4 will soon be stale.

1) Apple released the first iPhone without 3G and it was a huge success.

2) I dont recall a single LTE-capable smartphone at CES 2011 that was even close to the size of the iPhone. In fact I seem to recall vendors touting the thinnest smartphone or smartphone with LTE but never the two in the same package. I think the tech is just too new for that. Maybe Apple can get ahead of the curve in terms of size and power efficiency but I tend to look at Apple as investing in the right R&D not having any special magic so Id say that Apple having a phone the size of the iPhone 4 with LTE without any loss in usage is pretty slim.

Quote:

I think a larger iPhone option at the same resolution as the iPhone 4 would be a great option that would sell well. I see no demand for a smaller phone, just cheaper.

It would still require an update to the SDK to idealize the UI elements for the new size. the resolution staying the same is but one obstacle.

Dick Applebaum on whether the iPad is a personal computer: "BTW, I am posting this from my iPad pc while sitting on the throne... personal enough for you?"

They will stop with the thinner, lighter bit when iPad is a single sheet of paper.

Oh no. Think "The Minority Report." An iPad that crystalizes air molecules as you need them, where your data are projected onto the temporary monomolecular surface, where your hands reach in and use gestures to move things around, enlarge, shrink, edit, etc. When you're finished it just collapses while your data are saved somewhere in the so-called cloud. All in HD and 3D. No need to worry about glass or matte. No ports necessary. Powered by the friction of your hands moving through the air.

"We developed a special grade of ice that is both remarkably strong, unbelievably thin, and can withstand temperatures of up to 30degF above freezing point, ensuring an unbelievable experience for our Antarctic customers." -Jonathan Ives

Oh no. Think "The Minority Report." An iPad that crystalizes air molecules as you need them, where your data are projected onto the temporary monomolecular surface, where your hands reach in and use gestures to move things around, enlarge, shrink, edit, etc. When you're finished it just collapses while your data are saved somewhere in the so-called cloud. All in HD and 3D. No need to worry about glass or matte. No ports necessary. Powered by the friction of your hands moving through the air.

It's blindingly obvious that by 2015 the middle and upper class of China, India, Greater China and South East Asia will thoroughly eclipse the potential of US sales. Like Apple says, it's trying to figure out the best way of approaching this starting from China. There are a lot of hoops to jump through because Asia is actually quite diverse very unlike obviously the US and the EU.

Actually, I think it will happen sooner. But you are right. I think a lot of folks are underestimating the potential in asia.

Oh no. Think "The Minority Report." An iPad that crystalizes air molecules as you need them, where your data are projected onto the temporary monomolecular surface, where your hands reach in and use gestures to move things around, enlarge, shrink, edit, etc. When you're finished it just collapses while your data are saved somewhere in the so-called cloud. All in HD and 3D. No need to worry about glass or matte. No ports necessary. Powered by the friction of your hands moving through the air.

Oh puh-leeze. Dream on. That is so far off in the future.... maybe by 2015, but probably more like 2020.

1) If all existing owners of the current-gen device (iPhone4) receive the software update, how would it drive new sales (for current owners) ?

2) For those without an iPhone, I don't think a new OS release combined with old hardware will drive new sales --- particularly hardware that is 12+ months old. Anyone in their right mind would wait for the fall iPhone 5 release instead of buying iPhone 4 in July.

1) If all existing owners of the current-gen device (iPhone4) receive the software update, how would it drive new sales (for current owners) ?

2) For those without an iPhone, I don't think a new OS release combined with old hardware will drive new sales --- particularly hardware that is 12+ months old. Anyone in their right mind would wait for the fall iPhone 5 release instead of buying iPhone 4 in July.

Oh, come on! Don't destroy our fantasies with facts!

Seriously, your point is very well taken. It's good to see someone read between the lines.